For fourth-quarter 2017, AXT Inc of Fremont, CA, USA – which makes gallium arsenide (GaAs), indium phosphide (InP) and germanium (Ge) substrates and raw materials – has reported revenue of $26.3m, down 6.7% on $28.2m last quarter. This included $20.5m from substrate sales (down 8.5% on $22.4m last quarter) and $5.8m from raw material joint ventures (level with last quarter). However, Q4 revenue is up 30% on $20.3m a year ago and above the $26-27m guidance, driven by strength in InP and germanium (for solar cells, as the satellite industry continued its potential positive trend).

Fiscal

Q4/2016

Q1/2017

Q2/2017

Q3/2017

Q4/2017

Revenue

$20.3m

$20.6m

$23.6m

$28.2m

$26.3m

Of total revenue, North America comprised 9%, Asia Pacific 67% and Europe 24%. Again, two customers generated more than 10% of revenue, while the top five customers generated about 36% of revenue (down from 39% last quarter), reflecting continuing diversification of both products and customers.

Full-year revenue grew by 21% from $81.3m in 2016 to $98.7m in 2017, driven by record InP revenue (comprising about 30% of total revenue) and solid performance across the firm’s product portfolio, including 30% year-on-year growth in germanium substrate revenue.

Q4 gross margin was 37.2%, down from 39.5% last quarter but up slightly from 37.1% a year ago. Full-year gross margin has risen from 32.4% in 2016 to 34.9% in 2017.

Operating expenses have grown further, from $5.2m a year ago and $5.9m last quarter to $6.1m, pushing full-year OpEx from $20m in 2016 to $21.8m in 2017.

Net income was $3.1m ($0.08 per diluted share), down from $4.4m ($0.11 per diluted share) last quarter but up from $2.2m ($0.06 per diluted share) a year ago. Full-year net income has risen by 80% from $5.6m ($0.17 per diluted share) for 2016 to $10.1m ($0.26 per diluted share) for 2017.

During Q4, depreciation & amortization was steady at $1.1m. Capital expenditure (CapEx) has dropped back to $4.7m from a spike to $15m last quarter (mostly furnace systems for AXT’s new GaAs manufacturing facility in Dingxing, China, about 90 miles south of the existing Beijing plant)). Accounts receivable (net of reserves) rose from $20.9m to $22.3m. During the quarter, cash, cash equivalents and investments fell by $1.3m from $78.3m to $77m.

Net inventory rose from $40.8m to $45.8m (consisting of 51% in raw materials, 44% in work-in-progress, and only 5% in finished goods). “Both work-in-progress (WIP) and raw materials increased, and this is intentional as we see raw material prices increasing and as we build inventory during the relocation,” notes VP & chief financial officer Gary Fischer. “Recently we have begun to see an increase in raw material pricing, particularly gallium, largely a result of overall improvement in commodity pricing,” says CEO Dr Morris Young. “The increase to-date remains modest, and on the whole has served to bring suppliers close to breakeven levels, following a very significant decline in pricing over the last two years,” he adds.

“We also made good progress on the relocation of our gallium arsenide manufacturing facility and we are on track with our stated goal to provide qualification wafers [the firm’s first for 3D sensing applications] in Q1,” says Young. “Once submitted, the length of qualification process will depend on the sense of urgency within the supply chain,” he adds. “We could see modest amount of incremental opportunity from this application [3D sensing] in 2018, but with more meaningful contribution in 2019.”

For Q1/2018, AXT expects revenue of $26-27m (up 29% year-on-year), and profit of $0.07-0.09 per share.

“With the transition of our new factory now well underway, we are gaining a bit more clarity on our headcount requirements and other relocation-related expenses, including training and travel,” notes Fischer. “As such, we are anticipating that our quarterly OpEx in 2018 will remain at approximately the Q4/2017 level.”

“As we move into 2018, we are excited to see a resurgence of demand for compound semiconductor substrates in new applications across our product portfolio that have the power to reshape the technology landscape over the coming decades,” says Young. “We continue to invest in the advancement of our products and customer support capabilities, and believe that we are positioning the company well for continued growth and new opportunities in 2018 and beyond,” he adds.

“We are in an early stage of a multi-year opportunity for our indium phosphide business,” Young continues. “This is a highly specialized material in which AXT has made considerable market progress, both in terms of outstanding technical properties of our material as well as our customer traction. As a result, we are currently increasing our indium phosphide capacity in a meaningful way in order to meet the expected increase in demand for our product in 2018 and beyond.”

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